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ELLEN F. O'CONNELL / TIMES-SHAMroCK
State Sen. John Yudichak, D-Plymouth Township, serves on the Local Government Committee. It will hold a hearing on a bill prohibiting municipal 'swaps.'

HARRISBURG - A Senate hearing today on banning the use of some complicated and risky municipal financial transactions is expected to feature some heavy-hitting testimony.

The Local Government Committee is holding the hearing on bills to prohibit local governments, school districts and municipal authorities from using these transactions known as "swaps." The hearing is part of an ongoing effort to development legislation to protect taxpayers from excessive municipal debt.

Scheduled to testify are former state Auditor General Jack Wagner, who issued a 2009 audit critical of the impact of swaps on school district finances, several school district officials, Philadelphia City Treasurer Nancy Winkler and corporate officials representing the financial firms of Calhoun Baker, Boenning & Scattergood Inc. and Swap Financial and the law firm of Rhoads & Sinon.

The committee is scheduled to hear from two former Bethlehem Area School Board members. Wagner's audit showcased Bethlehem's experience in losing $10.2 million in taxpayer money because of the use of swaps.

Two committee members, Sens. John Blake, D-Archbald, and John Yudichak, D-Plymouth Township, anticipate a full-fledged debate over the swaps ban legislation.

"The hearing will explore why there needs to be greater oversight in dealing with complex financial transactions," said Yudichak.

Senators want to protect taxpayers while at the same time not overly limiting the ability of local governments to finance infrastructure and development projects, he said.

Swaps are a relatively recent phenomenon, available for local government financing under a 2003 state law.

They are described in Wagner's audit as a contract between a local government and investment bank to exchange cash flows. They were seen initially as an attractive investment in pre-recession years when interest rates on variable-rate bonds and notes were low in comparison with fixed-rate bonds and notes. Governments could take advantage of the lower rates, but that advantage lessened with the financial collapse in 2008.

The sponsor of the swaps ban bill, Sen. Mike Folmer, R-Lebanon, has compared swaps to gambling with taxpayer money.

From 2003 to 2012, municipalities and school districts had $17.2 billion in public debt tied to swaps, said Folmer. Drawing scrutiny from the committee in hearings last year was the mounting debt for a retrofit of the Harrisburg incinerator that threatened to bankrupt the city.

Senators will take more testimony on two other bills that have already won committee approval. These are a bill to give officials greater review power over municipal debt borrowings and a bill sponsored by Blake to give the state Ethics Commission authority to investigate alleged ethical violations by individuals involving in municipal financial transactions.

On a broader note, Yudichak said state government has to do more to help municipalities grappling with high debt, a shrinking tax base and increasing costs for public services and employee pensions.

"We have to in terms of the commonwealth become a better partner with our local governments," he said.

rswift@timesshamrock.com

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